Discounts could be an opportunity to buy into these companies but understand fundamentals first
Last week, the Cabinet Committee on Economic Affairs of the government of India approved stake sale in three state-owned companies. The government will sell its stake in NHPC Ltd (11.36%), Coal India Ltd (10%) and Oil and Natural Gas Corp. Ltd (5%). If the stake sale is successful, according to estimates, the government will be able raise about 43,000 crore from the process, which would be a record. The highest that the government has been able to raise through stake sales in a single year so far was 23,956.81 crore in 2012-13. It is also expected that to increase participation, the reservation for retail investors would be increased from 10% to 20%. Differently put, retail investors will be expected to buy shares worth about 8,600 crore in the stake sale. It is also being widely anticipated that retail investors will be offered shares at a discount. So, should you buy?
The tricky part
An offer for sale is tricky for the investor as well as the company because of pricing. Since the companies are already listed and the price is being discovered with every trade, it is difficult to set the offer price. If shares are not offered at a discount to the market price, there will be no incentive for investors to apply as they will be better off buying from the secondary market. However, if a discount is offered, the market price will correct as existing investors will offload shares in the secondary market to buy shares of the same company in the offer for sale.
Also, it becomes difficult for investors to take a call because prices may turn volatile at the time of stake sale. It is possible that investors are better off buying in the secondary market at the time of stake sale. For example, the government offloaded its stake in Steel Authority of India Ltd in March 2013 at the price of 63 per share. However, in the market, the stock fell from the level of 93 in January 2013 to 60.68 on the offer date. The benchmark S&P BSE Sensex declined close to 5% during the same period. Similarly, the share price of NTPC Ltd declined from the level of 150 on 22 January 2013 to 136.09 at the time of stake sale on 7 February 2013.
This time, too, things may not be very different. Share prices of all three companies corrected on 11 September, a day after the disinvestment announcement was made.
Investors who like these companies would probably already have the stocks in their portfolios, and price corrections and discounts at the time of stake sale would be an opportunity to accumulate more. However, for investors with no exposure to these companies, discounts on the prevailing market price could be an attraction.
“Participation will depend on the price at which shares are offered. If it is close to the market price, retail investors will not come in. My recommendation is to give 15% discount to the retail investors," said Prithvi Haldea, founder chairman, Prime Database.
Should retail investors invest only because of the discount? Remember, share prices adjust very rapidly in the stock market and the discount can vanish in no time. Therefore, investors who are only looking for an arbitrage opportunity should be careful.
Discount to market price at the time of an offer may not necessarily mean quick gains. Long-term investors should also avoid buying only because of the discount that is likely to be offered.
“Investors should look at the fundamentals and should not be driven only by the discount that is offered. If investors are convinced about the stock, the discount is an added advantage," said Dipen Shah, head (private client group research), Kotak Securities Ltd.
Discounts should not be treated as safety, added Haldea. “The discount does not mean safety; it reflects that retail investors are treated separately and are treated well," he added. Differently put, discount on the offer price will not eliminate the risk of investing in equities.
However, experts are of the view that investors could opt for these offers if the price is attractive. “They should go for it if the pricing is right," said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities Pvt. Ltd.
The current stake sale proposal by the government is the largest ever and, depending on pricing, will take away about 43,000 crore from the marketplace. Will it have an impact on the secondary market?
Experts say that it will not have a negative impact on the secondary market as there is ample liquidity. However, it is also being argued that the impact on the secondary market will depend on the timing and if the offers are spaced out, it will not have a negative impact. There is liquidity in the market to support these offers. Mutual funds have turned net buyers after a long gap and foreign investors continue to buy Indian shares.
Though experts are of the view that if the share sale is priced attractively, the government will be able to sell its stake successfully, they are not certain if this will revive activity in the primary market, which has not seen much action in recent times. “I don’t think that stake sale can revive the primary markets. It is the IPO (initial public offer) that revives the primary market," said Bandyopadhyay.
Mint Money take
The stake sale will depend on pricing and how markets behave at that point. There is a possibility that these stocks will turn volatile as pricing details emerge.
It would be advisable for investors to invest only if they like the company and not just to take advantage of an arbitrage opportunity, if any, as prices in secondary markets can quickly adjust to changing market realities.